What is Ethereum?

24 Mar 2021

1. Ethereum is a software platform used for its own cryptocurrency, Ether

Ethereum was launched in 2015 as an open-source, blockchain-powered, computing platform and operating system to be used for Ether (ETH) tokens. It is currently best known for its utility in Smart Contracts and Decentralised Applications (DAPPs).

Ether tokens are mostly used to run applications within the Ethereum network, and also to monetise any necessary functions within the network, such as the validation of transactions.

The Ethereum network is part of a larger movement amongst netizens to create a de-centralised internet (among other de-centralised initiatives), to replace traditional third parties that store data and financial records/ledgers.

2. Ethereum uses a Proof-of-Work (PoW) system

Similar to Bitcoin, transaction validation and record-keeping on the Ethereum network is done by volunteer validator “nodes”, who are then rewarded with newly minted Ether tokens as a reward for validating transactions maintaining the network.

Currently, 5 ETH tokens are minted every 15 seconds, for a hard cap of around 16 million ETH tokens that can be added to the overall supply annually. However, there is currently no cap to the amount of Ethereum that can be minted, meaning that the overall supply of Ethereum is technically unlimited. In comparison, there will only ever be 21 million Bitcoin in existence.

3. The Ethereum platform was built for a different purpose from Bitcoin

Ethereum was designed to support contracts and applications specifically, while Bitcoin was meant to be an alternative to traditional currencies such as the US Dollar.

Ether tokens are thus not meant to be seen as alternatives to currencies or even other cryptocurrencies such as Bitcoin. Ether tokens are instead intended to be a facilitative tool to help power and monetise the Ethereum network’s smart contract and DAPPs.

4. ETH tokens are seen as fuel for the Ethereum network

As previously stated, Ether tokens have only one intended purpose, to power DAPPs on the Ethereum network. DAPPs may be built for a variety of purposes – ranging from personal to business, but only ETH can provide the computing power to complete Ethereum transactions.

Operations on the network such as hosting and executing DAPPs are paid for in ETH. DAPPs that require more data and computational power accordingly require more ETH as payment. These network transaction fees are also more famously termed as “gas fees” and are also known as “gwei” or “nanoeth”.

ETH tokens are therefore the key to powering and monetising the Ethereum network, which in recap, was designed to host Smart Contracts and DAPPs.

5. Ethereum is upgrading to a Proof-of-Stake (PoS) model of validation

Ethereum is currently in the midst of upgrading to ETH2.0, where the PoW model will be abandoned in favour of a PoS model. Under a PoS model, validators to the network have to stake 32 ETH tokens before being allowed to join a queue to enter the validation network as a node. At the current rate of acceptance, ETH2.0 will likely have enough validators to proceed to the next phase of the upgrade (sharding), by Q32021.

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